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Tuesday, August 06, 2013

RINs: The answer to more E-85 fuel pumps and the “blend wall.”



 

The US Environmental Protection Agency announced its 2013 target for ethanol production, siding with the corn and ethanol industries and rebuffing the oil lobby and others speaking out against the current Renewable Fuels Standard.  In the process the EPA indicated that it would soon announce a target for 2014, which would address critical issues, including the “blend wall” which has blocked ethanol from expanding much further into the US fuel supply.  Now that the 2013 target is reality, there are questions about how the 2014 target can be practically implemented.

 

Since ethanol has been one of the main drivers of the corn market in recent years, the corn economy remains heavily dependent upon pro-ethanol policies.  That includes from Congress and the EPA.  While Congressional support is generally there, other than some naysayers who are funded by the oil lobby, the regulations promulgated by the EPA are critical, and that was the reason for the August 6th news that brought veritable high-fives from the Cornbelt and its network of small and large ethanol plants.

 

Among the positive comments:

  • Tom Buis, chief executive officer of Growth Energy, said his organization was pleased that EPA “has continued to show its strong commitment to the RFS. We look forward to closely reviewing the final rule and we strongly support increasing levels of renewable fuel into our nation’s fuel supply.”
     
  • Brooke Coleman, executive director of the Advanced Ethanol Council (AEC), said EPA “has done its homework when it comes to setting the 2013 standard. The commercial cellulosic biofuel facilities that EPA projected to start up in 2013 are indeed operating, and the adjusted targets reflect the number of actual gallons expected to be available through the end of the year.”
     
  • American Soybean Association President Danny Murphy said the 2013 target will allow “promising growth” of the biodiesel industry.  “During the confirmation process, Administrator [Gina] McCarthy repeatedly expressed her commitment to building bridges between the agricultural community and the EPA, and this announcement, which recognizes the strengths and benefits of the RFS and takes into account both the current and potential capabilities of the industries that produce these biofuels is a pragmatic and constructive step toward doing just that.”

 

The EPA rule, requires 16.55 billion gallons of renewable fuel to be blended into the US fuel supply.  That includes 10% ethanol, 15% ethanol, 85% ethanol, advanced biofuels from biomass, and bio-diesel from products such as soybean oil.  It also gives more time for makers of advanced biofuels to achieve the technology to better commercialize their product.  Additionally, the EPA signaled that its 2014 target would address the so-called “blend wall.”  The blend wall is so named for the fact that the motor fuel supply has absorbed about all of the ethanol that it can due to declining demand for gasoline.

 

So what will happen with the implementation of the Renewable Fuel Standard in 2014 that calls for the nation to use more than 16 billion gallons of ethanol, when 10% of the total motor fuel demand would only be 13 to 14 billion gallons?  That will call for a change in policy; say Iowa State University economists Bruce Babcock and Sebastien Pouliot.  In an in-depth analysis of the current challenges to implementation of the Renewable fuels Standard, the economists say some of their colleagues in the industry have offered some ideas.

 

Those ideas include:

  • Jason Bordoff, Director of Columbia University's Center on Global Energy Policy, opined that we should revise our mandates by staying behind the blend wall because of the high cost of RINs and the paucity of stations that sell E85.
  • Scott Irwin and Darrel Good from the University of Illinois advocate “freezing” the mandates just “over” the blend wall because of the uncertainty associated with consumer demand for higher-than-E10 blends.
  • Some in the oil industry also claim that it will be impossible to move beyond the blend wall so their only choice will be to reduce gasoline sales in the United States, thereby driving up consumer prices.

 

But Babcock and Pouliot contend the answer is E-85 ethanol, an 85% ethanol blend.  While sales of E-85 have not been much over 100 million gallons annually, E-10 is blended into 13+ billion gallons.  Ironically, E-85 is priced at a much lower rate than E-10 because the higher amount of ethanol is much less expensive than gasoline, yet its use is minimal.  Currently, unleaded gas is priced at $3.50 per gallon and ethanol is $2 per gallon and likely headed lower with the on-coming abundance of cheaper corn.  The Iowa State economists acknowledge the barriers to E-85, which is primarily the lack of available fueling stations.

 

The economists say it would be cheaper for oil companies to change the infrastructure of gas stations by installing E-85 pumps than to continue paying for ethanol in addition to the Renewable Identification Numbers (which is an instrument created by EPA to record and verify compliance with biofuel mandates. ) RINs are a tradable commodity that had cost 1-4 cents per gallon until earlier this year, then spiked at nearly $1.50 per gallon and raised the cost of ethanol for oil companies required to blend it into their gasoline.  That has caused serious challenges for both opponents and proponents of the Renewable Fuels Standard.

 

 

Babcock and Pouliot say there are two alternatives for US policy to head if there is a consensus in favor of pursuing greater use of biofuels in the motor fuel supply:

  1. The first choice is to apply a carbon tax to the gasoline portion of the fuel, but not to the ethanol portion of motor fuel, but they quickly say there would be a lack of an appetite for a carbon tax that would raise the price of gasoline.
  2. The better alternative they believe “the current policy of a mandate implemented with a tradable permit strategy (RINs) will create incentives for consumers, retailers, and oil companies to expand use of biofuels in the least cost manner.”

 

They justify their preferred alternative by adding, “Current high RIN prices create a large incentive for oil companies to increase consumption of E85 because expansion in E85 consumption will decrease RIN prices, and any reduction in RIN prices saves them significant amounts of money.”  Such a plan would increase ethanol consumption by as much as 3 billion gallons over the next year or two, keeping the Renewable Fuel Standard in place, and increasing the demand for flex-fuel vehicles.  They do acknowledge that the success of the plan depends on the EPA pushing biofuel use mandates higher, which increases the cost of the RINs, and keeps pressure on the oil companies to install E-85 pumps at gas stations.

 

Summary:

The EPA has indicated it will maintain its course in support of the Renewable Fuel Standard which undergirds the corn and ethanol economy, including continued support in 2014 that will address some of the concerns about the blend wall.  That ceiling on the use of ethanol in the motor fuel supply could be most easily addressed with greater use of E-85 fuels.  Such action would cause oil companies to install more E-85 pumps at service stations, selling more 85% ethanol, helping them avoid the cost of buying RINs when they also have to buy ethanol.

 

 

Posted by Stu Ellis on 08/06 at 10:50 PM | Permalink

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